I think it's fine to go to Rails 3 at this point, so long as you're aware of the potential pain points (and as a older seasoned Rails dev, I'm sure you are). I would still probably shy away from Ruby 1.9.x unless you knew that all the tooling/libraries you would need were supported, or wanted to go through the upgrade process on other people's libraries/write your own.

That said, if you're willing to do that, Ruby 1.9 is quite nice and a bit more performant as well.

[Setting Rails aside, ]the Ruby community needs help to move forward into the world of 1.9. 1.9 has many improvements that most people would benefit from, but many folks are either afraid to get their feet wet with 1.9, or have to support legacy applications. If anyone would be writing anything new in Ruby, I encourage them to write it for 1.9 and to leave 1.8 behind. For the past year or so, only about 5% of my stuff has been written to support 1.8. The rest has been written for 1.9, usually with syntax or feature usage that will not work under 1.8.

When developing new Ruby stuff, one thing to watch for is interoperability with old gems that are not 1.9-ready. But the good news is, most gems work just fine under 1.9 -- at least in the non-Rails world. I think I recall only one or two gems I tried to use that weren't updated to work with 1.9 yet, out of many that I use or discovered.